Hanging by a thread - State of clothing and textile industry

by Claire Bisseker

The clothing and textile industry is in terminal decline. A host of self-made problems have left it uncompetitive and vulnerable. As the full might of the global recession hits, SA could witness the annihilation of one of its most labour-intensive sectors. There's a new, ambitious government rescue plan. But Claire Bisseker argues that the package might be too late to save the industry.

One billion rand of the clothing industry's contribution to GDP was wiped out last year and more than 10 000 jobs were lost - about 10% of the industry's workforce. And that was when SA was still on the periphery of the global economic crisis and before it had entered a recession.

Since April this year, nine clothing factories have shut down. About 2 000 people in clothing manufacturing were robbed of their jobs in the first three months of 2009, while another 3 000 were lost in textiles. And, over the next two to three years, the industry is expected to shed 20 000 jobs a year. That' s about 60% of the total labour count.

The industry has battled for many years to attract capital and investment, resulting in the loss of 70 000 jobs over the past six years. It is riven with politics, and the department of trade & industry (DTI) has been weak in offering assistance. For years, companies have failed to invest in the new plant and equipment needed to modernise their firms. This reduced their ability to compete with low-cost producers. So, when cheap Chinese imports hit SA from 2004, the industry's weaknesses were exposed.

Anticipating major job losses this year, the DTI, labour and industry have crafted a R5bn rescue plan to be implemented over five years.

The 26-page Draft Rescue Package is a desperate reaction. It warns that "there are real prospects of de-industrialisation in the form of a great number of retrenchments and factory closures". This is hardly an exaggeration.

But a well-resourced competitiveness and skills upgrading plan should have been introduced at least two years ago when the industry still enjoyed multi stakeholder co-operation. Had it been, the industry would have had a fighting chance and wouldn't need to be rescued.

To try, in the midst of a devastating global economic crisis, to address an industry's deep structural weakness through an 11th-hour rescue plan is wildly unrealistic. It is too late. Capital and skills upgrading take time, and without the buy-in of retailers, whose co-operation was sacrificed over the Chinese quota plan, state-led support will go only half the distance.

First off, the draft plan notes that there has been a resurgence in imports since the lifting of Chinese clothing and fabric quotas at the end of last year.

According to the Clothing Trade Council of SA (Clotrade), imports of apparel for January 2009 were up 64% by value and 12% by volume on January 2008.

Meanwhile, SA Revenue Service data shows clothing and textile exports were down 9% over the same period, increasing SA's clothing and textile trade deficit by 65% to R1,5bn for January.

The fear is that with clothing export countries experiencing overcapacity because of the reduced demand from the US, Europe and Japan, countries like China and India, as well as a number of sub-Saharan African countries, will turn to markets like SA, offloading clothing at basement prices. At the same time, the fall-off in domestic demand is making retailers extremely price-sensitive, adding to the pressure on local manufacturers.

To compound the pain, local banks are tightening the screws on the industry. According to Clotrade, the restriction of credit by financial institutions is leading to liquidity problems even at well-run businesses. The banking sector is at risk of developing a reputation for "indefensible industry bias", says Clotrade executive director Jack Kipling.

This view is backed by sources within the Industrial Development Corp (IDC) which is being forced to take over the role of a traditional commercial bank to the clothing sector. The IDC has fielded four or five requests for help from textile and clothing manufacturers over the past six months, mainly because banks are reducing their credit facilities. Clotrade has calculated that the IDC may need to make R850m available as working capital to fund the potential liquidity shortfall.

"The clothing industry has entered this crisis in an incredibly weak position and the trend looks terminal," says industry consultant Justin Barnes. "Major interventions are needed to save the industry because, if left to its own devices, there will be a continued slide."

The draft rescue package seeks to provide a short-term shield against immediate factory closures while implementing a broad five-year competitiveness programme to secure the industry's long-term viability. It takes its cue from the presidential task team's response to the global economic crisis, which identifies the clothing and textile industry as a vulnerable sector.

"Yes, it is late," says DTI director-general Tshediso Matona, "but there is no way we can allow the sector to wither away because it is the leading labour-intensive sector in the economy."

The package shows that the DTI has finally grasped the extent of de-industrialisation that is under way, and it is prepared to initiate big investments to halt the slide. On the other hand, elements of the package amount to a cash bailout of an industry where endemic structural weaknesses have caused businesses to haemorrhage cash. The worst of them, according to the IDC, cannot be returned to profitability under any scenario.

The package thus proposes a production incentive which would allow companies to receive a cash subsidy based on their local production - adjusted for the number of workers employed.

It would be worth around R550m/year and would be made up of two parts:

  • A cash grant (equal to 80% of a firm's value added in year one); and
  • A competitiveness cash grant (commencing at 20% of a firm's value added).

Over five years the cash grant component would steadily decrease and be replaced by the competitiveness component, so that in year five the split would be 40:60. (The competitiveness grant must be used for training and spending on capital, quality improvements, marketing, design and product innovation.)

The grants are conditional on recipients retaining jobs and procuring locally, complying with labour standards, and ensuring modest executive remuneration and dividend payouts. The plan would replace the duty credit certificate scheme which costs around R550m/year and is to be terminated in March 2010.

The most obvious question is whether throwing cash at a terminal industry is the best use of taxpayers' money. It would be naive to hand cash to an industry with more than its share of ailing firms where many owners doubt the sustainability of their own industry.

"The danger is that unless the cash is tied to demonstrable equipment upgrading or reskilling, it will simply go to improving a company's bottom line, allowing CEOs to pay off their personal assets faster and exit the industry sooner," warns University of Cape Town economics professor Mike Morris. "If this happens, it could actually make the situation worse."

The 12 proposed programmes - nine industrial policy and three trade measures - will cost the fiscus at least R1bn in the first year, to support an industry that contributes about R17,5bn/year in value addition to the economy. "A billion sounds like a lot but given that about R1bn in value addition was wiped out last year and more than 10 000 jobs lost, if you let the situation persist for several years, the loss to the economy would soon be significant," says Barnes.

As always, it's not about the quantum of money spent. The real issue is about how the subsidies and incentives will be designed to ensure that the rescue plan doesn't cost more than the value it creates. For instance, the new Automotive Production & Development Programme for the motor industry took 18 months to research and design. One wonders if the same depth of analysis has been done for the clothing sector.

Even so, the package contains much that is sensible. At its core are two programmes: the new Competitiveness Improvement Programme (CIP) to enhance companies' productivity, and the Skills Development Plan to upgrade 20% of the workforce over five years.

The CIP will channel R300m/year through the IDC to fund 80% of clusters' and 75% of firms' costs for programmes that raise competitiveness. The R255m/year skills programme (of which R174m/year will come from government) is mostly to fund learnerships to upskill the existing workforce. It will also fund 300 apprenticeships and train 300 technologists and 30 master's students a year. Where possible, employers will be offered "training layoffs" to keep workers, who were to be retrenched, employed during the recession and to reskill them.

These programmes sound sensible and have been well received by the industry in recent nationwide workshops. Selwyn Eagle, who heads Foschini's manufacturing arm, is upbeat about the future. "We're working closely with the DTI to obtain 75% of our training costs and will be engaging with the IDC to get their low-interest loans for capital upgrading for some of our manufacturers," he says. "At prime minus 5%, it is very attractive."

But concerns remain. One is that the few service providers still supporting the industry are so denuded of technical capacity that it would be wasteful to throw millions of rand at them and expect them to scale up their efforts overnight. In essence the proposals stem from the Customised Sector Programme (CSP) which was negotiated in a tortuous two-year process from 2004 to 2006, involving government, business and labour, and the Southern African Clothing & Textile Workers' Union (Sactwu).

The CSP recognised that the clothing industry suffers from a deep-seated lack of competitiveness that predates the current crisis.

In 2008, the average SA clothing manufacturer made a profit of 3,4% and an average return on investment of 10% (down from 17% in 2005). Turnover contracted by 10,5% at a manufacturing level and the average capital investment was a mere 0,8% of sales. (In clothing it should be at least 3,5% to ensure sustainability of the enterprise.)

"What this shows is nobody is investing in this industry," explains Barnes. "Shareholders typically require a return on investment of 20%-30% in a normal manufacturing business. This means the existing asset stock is being sweated; the plant is old and tired and neither workers nor managers are getting training."

Given that the solutions have been obvious for years, it is fair to ask why nothing was done before. The answer is a depressing case study on how to sabotage an industry. It's a cautionary tale for any government. The CSP was on the verge of being signed in late 2006 when the DTI dropped the Chinese clothing quotas on retailers and manufacturers. Based on an application by Sactwu, the quotas drove a wedge between business on the one hand and the DTI and Sactwu on the other, deeply damaging the DTI's credibility with business.

The CSP is still not signed. Had it been enacted successfully two years ago, the industry would have been in a far stronger position to weather the coming downturn. "We're on the periphery of a very large storm and we're all running around battening down the hatches," says Graham Choice, chairman of the Cape Clothing Association. "All the programmes from the DTI and IDC have taken 24 months to get here. Now they need to move faster and ensure these programmes start operating or the clothing industry will go through what the auto industry is going through."

Morris agrees. "We could have acted earlier if it wasn't for the actions of the very people who are now claiming to be rescuing the industry," he says. "It's a case of rescue us from whom? Rescue us from ourselves."

A pernicious consequence of the quotas was that it split the Business Alliance along the value chain. The alliance was a historical alignment because, for the first time, it got retailers as well as textile and clothing manufacturers to sing from the same page. The big idea behind the alliance (and the CSP) was that the industry would never be world-class until there was value chain alignment. It acknowledged that unless retailers formed tight, reciprocal relationships with manufacturers and they, in turn, with textile mills, the local chain would never achieve the speed and flexibility required to prevent retailers from sourcing internationally.

This thinking needs to inform the rescue plan because if it's just about supporting individual firms it will disappoint. But if retailers can be convinced there is value in sourcing locally, then there's a chance the industry could recover.

Barnes has done detailed work through the Cape and KwaZulu Natal clothing clusters to see how to restructure the linkages between firms to give retailers a domestic advantage. He has found that to get a garment out of China takes 165 days on average. To get the same garment made locally takes 142 days and is 30% more expensive, so retailers source from the East. The best retailer in the world, Zara in Spain, can turn a garment around in just 22 days. "We've discovered that the magic number for local retailers is 56 days," says Barnes. "If we can achieve that, then we've achieved a major differentiator between SA and China."

According to factory owners, the DTI's support mechanisms recognise that the solution lies in value chain alignment. They are relieved that the DTI is grasping this concept as well as the urgency required, though a residual cynicism leads many to suggest that this is only because Seardel is under pressure. And so Sactwu, its backer, now finds itself in the unfamiliar role of cash-bleeding employer.

The belief that the DTI moves only when Sactwu releases the handbrake will take a long time to disappear, given the way the DTI abdicated responsibility for administering firms' applications for additional quotas to Sactwu.

For this reason, the DTI's intention in the rescue package, to remove the 22% import duty on a few classes of fabric - though welcomed by manufacturers who rely extensively on fabric imports - has raised eyebrows. "I nearly fell off my chair when I saw that," says one manufacturer who expects the move to shave more than 10% off his cost of producing a clothing item.

The reason for the surprise is that the DTI persisted with fabric quotas over the past two years even when it was apparent that manufacturers and cut-make-and-trim operators (the intended beneficiaries of the quota plan) were being forced to source fabric locally because of quality defects and late deliveries.

If the first serious flaw in the quota plan was that it failed to foresee that shutting out China would just drive importers into the arms of other cheap country suppliers, the second was failing to accept that the local industry lacked the capacity to meet the gap that would be created.

The CSP was supposed to be enacted during the quota period to fund extensive capital upgrading to enable local firms, especially textile mills, to ramp up to meet the increased demand. But the DTI had scored an own goal over the quotas. Retailers - which experienced the quotas as pecuniary punishment enforced by Sactwu - were supposed to fund the CSP to the tune of millions. Most retailers pulled out of the CSP and so it gathered dust.

Says Matona: "The DTI has taken enormous blame and criticism but it is completely unfair to blame us for that - that's an oversimplification. We could even make the argument that the quotas were used as an excuse by retailers to pull out of the CSP." He suggests that the real reason for the fall out was retailers' lack of commitment to sourcing locally.

Matona agrees, though, that it's important to get retailers to buy back in. "The decision on whether something can still be done to save the industry doesn't just depend on the DTI; it also depends on industry co-operation. It's not enough to employ the programmes we're proposing if the role players aren't co-operating, so there's still some policy work that needs to be done to forge that consensus."

So is anyone doing it? "No," he concedes. "Our attention has been on the rescue package." Given this background, the DTI's policy shift - from keeping imported fabric out through quotas in 2008, and making it cheaper to import fabric in 2009 - is an important psychological one. The move could even be interpreted to mean that government sees little prospect of the textile industry expanding beyond its current footprint.

The industry lost 5 000 workers in 2008 and another 3 000 in the first three months of 2009. The closure of four divisions of Frame Textiles, Seardel's flagship textile mill in Durban, will add another 1 400 job losses from July. The IDC was approached to see if it could save Frame but it didn't believe it could be returned to long-term profitability, according to the IDC's textile & clothing unit head, Willie Fourie.

Textile Federation executive director Brian Brink expects formal employment in the textile sector to be down to 40 000 by year-end, its lowest ever. The peak was 110 000 in the mid-1980s though it's been around 60 000 for most of the past decade. "Times are tough," says Brink. "By the end of this year we might start talking about the demise of the industry. We're getting close to using that phrase."

While some manufacturers believe thousands of jobs can be saved if all remaining duties are removed on fabric that is not produced in commercial quantities in SA, others argue that SA will never be able to achieve fast, flexible clothing manufacturing without a strong domestic textile base.

India has come to realise this and is scouring the world for looms, making it probable that Indian firms will buy up Frame's equipment and then make and sell the finished clothing back to SA. It's madness - but as a country we've only ourselves to blame.

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